##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission File Number: (Under the Securities Act of 1933) 33-37977
 MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
 
  MICHIGAN
    
    38-2726166(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)100 PROGRESS PLACE, MIDLAND, MICHIGAN
    
    48640(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:
    
    (989) 839-6000
 þ o
 Rule 12b-2
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PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)
    
    
    2Balance Sheets
    
    
    2Statements of Operations
    
    
    3Statements of Partners Equity and Comprehensive Income (Loss)
    
    
    4Statements of Cash Flows
    
    
    5Condensed Notes to Unaudited Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A)
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    24PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3.
    
    Defaults Upon Senior Securities
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Item 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits
    
    
    26Signatures
    
    
    
    
    27Certifications
    
    
    
    
    28Certification of President and CEO Pursuant to Section 302Certification of CFO, VP and Controller Pursuant to Section 302Certification of President and CEO Pursuant to Section 906Certification of CFO, VP and Controller Pursuant to Section 906
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements (Unaudited)
  
 
 March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    233,746
    
    
    $
    360,562Accounts and
notes receivable  related parties
    
    
    39,134
    
    
    
    30,514Accounts receivable
    
    
    59,899
    
    
    
    108,393Gas inventory
    
    
    23,898
    
    
    
    16,138Unamortized property taxes
    
    
    42,686
    
    
    
    18,238Derivative assets
    
    
    120,573
    
    
    
    241,135Broker margin accounts and prepaid expenses
    
    
    42,183
    
    
    
    20,294Total current assets
    
    
    562,119
    
    
    
    795,274PROPERTY, PLANT AND EQUIPMENT:Property, plant and equipment
    
    
    2,479,796
    
    
    
    2,479,071Pipeline
    
    
    21,432
    
    
    
    21,432Total property, plant and equipment
    
    
    2,501,228
    
    
    
    2,500,503Accumulated depreciation (Note 3)
    
    
    (2,277,239
    )
    
    
    (2,276,089
    )Net property, plant and equipment
    
    
    223,989
    
    
    
    224,414OTHER ASSETS:Restricted investment securities held-to-maturity
    
    
    89,357
    
    
    
    90,915Derivative assets, non-current
    
    
    116,563
    
    
    
    186,336Deferred financing costs, net of accumulated amortization of
$19,839 and $19,580, respectively
    
    
    5,126
    
    
    
    5,385Prepaid gas costs, spare parts deposit, materials and supplies
    
    
    15,763
    
    
    
    15,554Total other assets
    
    
    226,809
    
    
    
    298,190TOTAL ASSETS
    
    $
    1,012,917
    
    
    $
    1,317,878LIABILITIES AND PARTNERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued liabilities  related parties
    
    $
    13,973
    
    
    $
    16,651Accounts payable and accrued liabilities
    
    
    100,418
    
    
    
    118,663Gas supplier funds on deposit  related parties
    
    
    23,569
    
    
    
    44,353Gas supplier funds on deposit
    
    
    79,215
    
    
    
    148,650Interest payable
    
    
    56,750
    
    
    
    45,057Current portion of long-term debt
    
    
    63,459
    
    
    
    63,459Total current liabilities
    
    
    337,384
    
    
    
    436,833NON-CURRENT LIABILITIES:Long-term debt
    
    
    878,638
    
    
    
    878,638Other
    
    
    922
    
    
    
    805Total non-current liabilities
    
    
    879,560
    
    
    
    879,443COMMITMENTS AND CONTINGENCIES (Note 9)TOTAL LIABILITIES
    
    
    1,216,944
    
    
    
    1,316,276PARTNERS EQUITY (DEFICIT)
    
    
    (204,027
    )
    
    
    1,602TOTAL LIABILITIES AND PARTNERS EQUITY
    
    $
    1,012,917
    
    
    $
    1,317,878
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Three Months EndedMarch 31,2006
    
    
    2005OPERATING REVENUES:Capacity
    
    $
    97,740
    
    
    $
    99,522Electric
    
    
    39,372
    
    
    
    44,510Steam
    
    
    5,559
    
    
    
    6,027Total operating revenues
    
    
    142,671
    
    
    
    150,059OPERATING EXPENSES:Fuel costs (Note 2)
    
    
    268,587
    
    
    
    (119,924
    )Depreciation
    
    
    6,878
    
    
    
    22,112Operations
    
    
    4,190
    
    
    
    4,376Maintenance
    
    
    2,290
    
    
    
    2,236Property and single business taxes
    
    
    7,427
    
    
    
    7,337Administrative, selling and general
    
    
    2,916
    
    
    
    2,800Total operating expenses
    
    
    292,288
    
    
    
    (81,063
    )OPERATING INCOME (LOSS)
    
    
    (149,617
    )
    
    
    231,122OTHER INCOME (EXPENSE):Interest and other income
    
    
    3,687
    
    
    
    2,136Interest expense
    
    
    (23,780
    )
    
    
    (25,113
    )Total other income (expense), net
    
    
    (20,093
    )
    
    
    (22,977
    )NET INCOME (LOSS)
    
    $
    (169,710
    )
    
    $
    208,145
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Three Months EndedMarch 31,2006
    
    2005General Partners
    
    Limited Partners
    
    Total
    
    General Partners
    
    Limited Partners
    
    TotalBALANCE, BEGINNING OF PERIOD
    
    $
    (9,970
    )
    
    $
    11,572
    
    
    $
    1,602
    
    
    $
    693,824
    
    
    $
    116,152
    
    
    $
    809,976Comprehensive Income (Loss):Net income (loss) (Note 2)
    
    
    (147,755
    )
    
    
    (21,955
    )
    
    
    (169,710
    )
    
    
    181,217
    
    
    
    26,928
    
    
    
    208,145Other Comprehensive Income (Loss):Unrealized gain (loss) on
hedging activities since
beginning of period
    
    
    (25,885
    )
    
    
    (3,846
    )
    
    
    (29,731
    )
    
    
    44,416
    
    
    
    6,599
    
    
    
    51,015Reclassification adjustments
recognized in net income
above
    
    
    (5,387
    )
    
    
    (801
    )
    
    
    (6,188
    )
    
    
    (3,268
    )
    
    
    (485
    )
    
    
    (3,753
    )Dedesignated cash flow hedges
(Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,509
    )
    
    
    (3,791
    )
    
    
    (29,300
    )Total other comprehensive
income (loss)
    
    
    (31,272
    )
    
    
    (4,647
    )
    
    
    (35,919
    )
    
    
    15,639
    
    
    
    2,323
    
    
    
    17,962Total Comprehensive Income (Loss)
    
    
    (179,027
    )
    
    
    (26,602
    )
    
    
    (205,629
    )
    
    
    196,856
    
    
    
    29,251
    
    
    
    226,107BALANCE, END OF PERIOD
    
    $
    (188,997
    )
    
    $
    (15,030
    )
    
    $
    (204,027
    )
    
    $
    890,680
    
    
    $
    145,403
    
    
    $
    1,036,083
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Three Months EndedMarch 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (169,710
    )
    
    $
    208,145Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:Depreciation and amortization
    
    
    7,137
    
    
    
    22,395Decrease in derivative assets
    
    
    154,416
    
    
    
    2,510Decrease in accounts receivable
    
    
    39,874
    
    
    
    8,088Increase in gas inventory
    
    
    (7,760
    )
    
    
    (22,889
    )(Increase) decrease in unamortized property taxes
    
    
    (24,448
    )
    
    
    1,943Increase in broker margin accounts and prepaid expenses
    
    
    (21,889
    )
    
    
    (210,061
    )(Increase) decrease in prepaid gas costs, spare parts deposit,
materials and supplies
    
    
    (209
    )
    
    
    595(Decrease) increase in accounts payable and accrued liabilities
    
    
    (20,923
    )
    
    
    18,798Decrease in gas supplier funds on deposit
    
    
    (90,219
    )
    
    
    (14,406
    )Increase in interest payable
    
    
    11,693
    
    
    
    5,866Increase (decrease) in other non-current liabilities
    
    
    117
    
    
    
    (270
    )Net cash (used in) provided by operating activities
    
    
    (121,921
    )
    
    
    20,714CASH FLOWS FROM INVESTING ACTIVITIES:Plant modifications and purchases of plant equipment
    
    
    (6,453
    )
    
    
    (7,599
    )Maturity of restricted investment securities held-to-maturity
    
    
    27,856
    
    
    
    126,353Purchase of restricted investment securities held-to-maturity
    
    
    (26,298
    )
    
    
    (125,755
    )Net cash used in investing activities
    
    
    (4,895
    )
    
    
    (7,001
    )NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (126,816
    )
    
    
    13,713CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    360,562
    
    
    
    125,781CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    233,746
    
    
    $
    139,494
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(1)
    
    THE PARTNERSHIP AND ASSOCIATED RISKSMCV was organized to construct, own and operate a combined-cycle, gas-fired cogeneration
facility (the Facility) located in Midland, Michigan. MCV was formed on January 27, 1987,
and the Facility began commercial operation in 1990.The Facility has a net electrical generating capacity of approximately 1500 MW (including
approximately 100 MW of duct burner generation, from five of six duct burners, which are
currently unavailable for operational use) and approximately 1.5 million pounds of process
steam capacity per hour. MCV has entered into three principal energy sales agreements. MCV has
contracted to (i) supply up to 1240 MW of electric capacity (Contract Capacity) to Consumers
Energy Company (Consumers) under the Power Purchase Agreement (PPA), for resale to its
customers through 2025, (ii) supply electricity and steam to The Dow Chemical Company (Dow)
through 2008 and 2015, respectively, under the Steam and Electric Power Agreement (SEPA) and
(iii) supply steam to Dow Corning Corporation (DCC) under the Steam Purchase Agreement
(SPA) through 2011 (see Note 8, Commitments and Contingencies  Dow Corning Contract
Termination). From time to time, MCV enters into other sales agreements for the sale of
excess capacity and/or energy available above MCVs internal use and obligations under the PPA,
SEPA and SPA. Results of operations are primarily dependent on successfully maintaining
availability of the Facility at or near Contract Capacity levels, the price and availability of
natural gas, the level of energy rates paid to MCV relative to the cost of fuel used for
generation, and Consumers ability to perform its obligations under the PPA. Sales pursuant to
the PPA have historically accounted for over 90% of MCVs revenues.The PPA permits Consumers, under certain conditions, to reduce the capacity and energy charges
payable to MCV and/or to receive refunds of capacity and energy charges paid to MCV if the
Michigan Public Service Commission (MPSC) does not permit Consumers to recover from its
customers the capacity and energy charges specified in the PPA (the regulatory-out
provision). Until September 15, 2007, however, the capacity charge may not be reduced below an
average capacity rate of 3.77 cents per kilowatt-hour for the available Contract Capacity
notwithstanding the regulatory-out provision. Consumers and MCV are required to support and
defend the terms of the PPA.The Facility is a qualifying cogeneration facility (QF) originally certified by the
Federal Energy Regulatory Commission (FERC) under the Public Utility Regulatory Policies Act
of 1978, as amended (PURPA). In order to maintain QF status, certain operating and
efficiency standards must be maintained on a calendar-year basis. In the case of a
topping-cycle generating plant such as the Facility, the applicable operating standard requires
that the portion of total energy output that is put to some useful purpose other than
facilitating the production of power (the Thermal Percentage) be at least 5%. In addition,
the Facility must achieve a PURPA efficiency standard (the sum of the useful power output plus
one-half of the useful thermal energy output, divided by the energy input (the Efficiency
Percentage)) of at least 45%. If the Facility maintains a Thermal Percentage of 15% or
higher, the required Efficiency Percentage is reduced to 42.5%. Since 1990, the Facility has
achieved the applicable Thermal and Efficiency Percentages. For the three months ended March
31, 2006, the Facility achieved a Thermal Percentage of 29.7% and an Efficiency Percentage of
47.3%. The loss of QF status could, among other things, cause MCV to lose its rights under
PURPA to sell power from the Facility to Consumers at Consumers avoided cost and subject MCV
to additional federal and state regulatory requirements.MCV and Consumers entered into a Resource Conservation Agreement (RCA) and a Reduced Dispatch
Agreement (RDA) which, among other things, provides that Consumers will economically dispatch
MCV, based upon the market price of natural gas, if certain conditions are met. Such dispatch
is expected to reduce electric production from historic levels, as well as decrease gas
consumption by MCV. The RCA provides that
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(2)
    
    RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONSFair Value of Financial InstrumentsThe carrying amounts of cash, cash equivalents and short-term investments approximate fair
value because of the short maturity of these instruments. MCVs short-term investments, which
are made up of investment securities held-to-maturity, as of March 31, 2006 and December 31,
2005, have original maturity dates of approximately one year or less. The unique nature of the
negotiated financing obligation discussed in Note 7- Long-Term Debt makes it unnecessary to
estimate the fair value of the lessor group (Owner Participants) underlying debt and equity
instruments supporting such financing obligation, since Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosures about Fair Value of Financial Instruments does not
require fair value disclosure for the lease obligation.Accounting for Derivative Instruments and Hedging ActivitiesMCV records every derivative instrument on the balance sheet as either an asset or liability
measured at its fair value, except for those which qualify for the normal purchases and normal
sales exception. SFAS No. 133 requires that changes in a derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges in some cases allows a derivatives gains and losses to offset related
results on the hedged item in the income statement or permits recognition of the hedge results
in other comprehensive income, and requires that a company formally document, designate and
assess the effectiveness of transactions that receive hedge accounting.Electric Sales AgreementsPrior to April 1, 2005, MCV had concluded that its electric sales agreements did not qualify as
derivatives under SFAS No. 133, due to the lack of an active energy market in the State of
Michigan. With the launch of the Midwest Independent System Operator (MISO) market effective
April 1, 2005, MCV concluded that an active energy market may exist and as such, the agreements
may qualify as derivatives. MCV currently believes that these electric sales agreements
qualify under SFAS No. 133 for the normal purchase and normal sale exception. Therefore, these
contracts continue to not be recognized at fair value on the balance sheet.Natural Gas Supply ContractsMCV management believes that its long-term natural gas contracts, except for those which
contain volume optionality and the long term gas contracts under the RCA/RDA, qualify under
SFAS No. 133 for the normal purchases and normal sales exception. Therefore, these contracts
are currently not recognized at fair value on the balance sheet.Mark-to-Market ActivityMCV holds certain long-term gas contracts that do not qualify for the normal purchases and
sales exception, under SFAS No. 133, because (1) these gas contracts contain volume optionality
and/or (2) are gas contracts associated with the implementation of the RCA/RDA in January 2005.
With the implementation of the RCA/RDA, MCV determined that additional gas contracts no longer
qualified under the normal purchases and sales exception, because the contracted gas will not
be consumed for electric production. Therefore, both the contracts with volume optionality and
the contracts affected by the RCA/RDA are being accounted for as derivatives, which do not
qualify for hedge accounting treatment. In addition, the financial derivatives associated with
the long-term gas contracts now under the RCA/RDA that were previously recognized as cash
flow hedges in other comprehensive income were dedesignated as hedges in the first quarter of
2005 and marked-to-market through earnings since the previously hedged long-term gas contracts
no longer qualify for the normal purchase and sales exception. MCV expects future earnings
volatility on all of these contracts as changes in the mark-to-market recognition are recorded
in earnings on a quarterly basis.
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Natural Gas Supply Futures and Options Which Qualify for Hedge Accounting
     (3)
    
    ASSET IMPAIRMENTSFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets requires that MCV
review, on a forward-looking basis, the recoverability of its long-lived assets (such as
property, plant and equipment)
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(4)
    
    RESTRICTED INVESTMENT SECURITIES HELD-TO-MATURITYNon-current restricted investment securities held-to-maturity have carrying amounts that
approximate fair value because of the short maturity of these instruments and consist of the
following as of (in thousands):
 March 31,
    
    
    December 31,2006
    
    
    2005Funds restricted for rental
payments pursuant to the Overall
Lease Transaction
    
    $
    88,435
    
    
    $
    90,111Funds restricted for management
non-qualified plans
    
    
    922
    
    
    
    804Total
    
    $
    89,357
    
    
    $
    90,915
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(5)
    
    ACCOUNTS PAYABLE AND ACCRUED LIABILITIESAccounts payable and accrued liabilities consist of the following as of (in thousands):
 March 31,
    
    
    December 31,2006
    
    
    2005Accounts
payable  related parties
    
    $
    13,973
    
    
    $
    16,651Accounts
payable  non-related
Trade creditors
    
    $
    61,550
    
    
    $
    100,956Property and single business taxes
    
    
    32,338
    
    
    
    11,088Other
    
    
    6,530
    
    
    
    6,619Total
accounts payable  non-related
    
    $
    100,418
    
    
    $
    118,663
 (6)
    
    GAS SUPPLIER FUNDS ON DEPOSITPursuant to individual gas contract terms with counterparties, including margin accounts with
futures and option brokers, deposit amounts or letters of credit may be required by one party
to the other based upon the net amount of exposure. The net amount of exposure will vary with
changes in market prices, credit provisions and various other factors. Collateral paid or
received will be posted by one party to the other based on the net amount of the exposure.
Interest is earned on funds on deposit. MCV has paid or received the following as of (in
thousands):
 March 31,
    
    
    December 31,2006
    
    
    2005Cash or letters of credit supplied by MCV to others:Cash paid, recorded in Broker margin accounts and prepaid
expenses
    
    $
    39,135
    
    
    $
    16,520Letters of credit provided to others
    
    
    2,430
    
    
    
    2,430Cash or letters of credit supplied to MCV by others:Cash received, recorded in Gas supplier funds on deposit
    
    
    79,215
    
    
    
    148,650Cash received by El Paso (a related party), recorded in Gas
supplier funds on deposit  related parties
    
    
    23,569
    
    
    
    44,353Letters of credit provided to MCV from non-related parties
    
    
    
    
    
    
    21,700Letters of credit provided to MCV by El Paso (a related party)
    
    
    302,700
    
    
    
    385,700
 (7)
    
    LONG-TERM DEBTLong-term debt consists of the following as of (in thousands):
 March 31,
    
    
    December 31,2006
    
    
    2005Financing obligation, maturing through
2015, payable in semi-annual installments
of principal and interest, collateralized
by property, plant and equipment
    
    $
    942,097
    
    
    $
    942,097Less current portion
    
    
    (63,459
    )
    
    
    (63,459
    )Total long-term debt
    
    $
    878,638
    
    
    $
    878,638
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Financing Obligation
    (8)
    
    ACCUMULATED OTHER COMPREHENSIVE INCOMEAccumulated other comprehensive income reflects the following balances at March 31
(thousands):
 2006
    
    
    2005Beginning Accumulated Other Comprehensive Income
    
    $
    174,844
    
    
    $
    65,774Unrealized gain on hedging activities
    
    
    (29,731
    )
    
    
    51,015Reclassification adjustments recognized in
net income
    
    
    (6,188
    )
    
    
    (3,753
    )Dedesignated cash flow hedges
    
    
    
    
    
    
    (29,300
    )Ending Accumulated Other Comprehensive Income
    
    $
    138,925
    
    
    $
    83,736
 (9)
    
    COMMITMENTS AND CONTINGENCIESProperty TaxesIn 1997, MCV filed a property tax appeal against the City of Midland at the Michigan Tax
Tribunal contesting MCVs 1997 property taxes. Subsequently, MCV filed appeals contesting its
property taxes for tax years 1998  2005 at the Michigan Tax Tribunal. A trial was held for
tax years 1997  2000. The appeals for tax years 2001-2005 are being held in abeyance. In 2004,
the Michigan Tax Tribunal issued its decision in MCVs tax appeal against the City of Midland
for tax years 1997-2000 (the MTT Decision). The MTT Decision was appealed to the Michigan
Appellate Court by the City of Midland. MCV filed a cross-appeal at the Michigan Appellate
Court. On February 21, 2006, the Michigan Appellate Court upheld the MTT Decision but remanded
the case to the MTT for the limited purpose of clarification of whether the MTT erroneously
included tax-exempt pollution-control equipment or property located outside the City of Midland
in its concluded true cash value. MCV management has estimated that the MTT Decision, the
Appellate Court order and the impact of Michigan law (Proposal A, which caps taxable value
increases) would result in a refund to MCV for the tax years 1997  2005 of approximately $86.6
million, inclusive of interest as of March 31, 2006. If on the remanded issues the MTT
determines there was such double taxation, MCV will be entitled to a greater refund. On April
4, 2006, the City of Midland filed an application for Leave to Appeal with the Michigan Supreme
Court. MCV responded in opposition to that application. MCV management cannot
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NOx Allowances
  Environmental Issues
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Dow Corning Contract Termination
  (10)
    
    RETIREMENT BENEFITSPostretirement Health Care PlansIn 1992, MCV established defined benefit postretirement health care plans (Plans) that cover
all full-time employees, excluding key management. The Plans provide health care credits, which
can be utilized to purchase medical plan coverage and pay qualified health care expenses.
Participants become eligible for the benefits if they retire on or after the attainment of age
65 or upon a qualified disability retirement, or if they have 10 or more years of service and
retire at age 55 or older. The Plans granted retroactive benefits for all employees hired prior
to January 1, 1992. This prior service cost has been amortized to expense over a five year
period. MCV annually funds the current year service and interest cost as well as amortization
of prior service cost to both qualified and non-qualified trusts. The MCV accounts for retiree
medical benefits in accordance with SFAS 106, Employers Accounting for Postretirement Benefits
Other Than Pensions. This standard required the full accrual of such costs during the years
that the employee renders service to the MCV until the date of full eligibility.Net periodic postretirement health care cost for the three months ending March 31, included the
following components (in thousands):
 2006
    
    
    2005Components of net periodic benefit cost:Service cost
    
    $
    81.2
    
    
    $
    77.9Interest cost
    
    
    61.6
    
    
    
    57.5Expected return on Plan assets
    
    
    (58.9
    )
    
    
    (46.9
    )Amortization of unrecognized net loss
    
    
    19.3
    
    
    
    21.4Net periodic benefit cost
    
    $
    103.2
    
    
    $
    109.9
 Contributions
  - 14 -




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Supplemental Retirement Benefits
  - 15 -




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##### Table of Contents



(11)
    
    PARTNERS EQUITY AND RELATED PARTY TRANSACTIONSThe following table summarizes the nature and amount of each of MCVs Partners equity interest,
interest in profits and losses of MCV at March 31, 2006, and the nature and amount of related
party transactions or agreements that existed with MCVs partners or affiliates as of March 31,
2006 and 2005, and for each of the three month periods ended March 31 (in thousands):
 Beneficial Owner, Equity Partner,Type of Partner and Nature of Related Party
    
    Equity Interest
    
    
    Interest
    
    
    Related Party Transactions and Agreements
    
    2006
    
    
    2005CMS Energy CompanyCMS Midland, Inc.
    
    $
    (99,974
    )
    
    
    49.0
    %
    
    Power purchase agreements
    
    $
    88,903
    
    
    $
    120,319General
Partner; wholly-owned subsidiary of Consumers Energy
    
    
    
    
    
    
    
    
    
    Purchases under gas transportation agreements
    
    
    2,307
    
    
    
    2,303Company
    
    
    
    
    
    
    
    
    
    Gas storage agreement
    
    
    641
    
    
    
    641Land lease/easement agreements
    
    
    150
    
    
    
    150Accounts receivable
    
    
    35,382
    
    
    
    38,687Accounts payable
    
    
    1,692
    
    
    
    3,987El Paso Corporation (1)El Paso Midland, Inc.
    
    
    
    
    
    
    
    
    
    Purchase under gas transportation agreements
    
    
    2,201
    
    
    
    3,435A General and Limited Partner;
    
    
    
    
    
    
    
    
    
    Purchases under gas supply agreement
    
    
    37,756
    
    
    
    27,629General Partnership Interest
    
    $
    (89,023
    )
    
    
    38.1
    %
    
    Gas agency agreement
    
    
    32
    
    
    
    33Limited Partnership Interest
    
    
    (12,716
    )
    
    
    5.4
    
    
    Accounts payable
    
    
    11,607
    
    
    
    10,452Deferred reservation charges under gas
    
    
    1,187
    
    
    
    2,763purchase agreementGas supplier funds on deposit
    
    
    23,569
    
    
    
    Total El Paso Corporation
    
    $
    (101,739
    )
    
    
    43.5
    %
    
    Letter of credit provided to MCV
    
    
    302,700
    
    
    
    250,600The Dow Chemical CompanyThe Dow Chemical Company
    
    $
    (2,315
    )
    
    
    7.5
    %
    
    Steam and electric power agreement
    
    
    9,879
    
    
    
    10,514Limited Partner
    
    
    
    
    
    
    
    
    
    Steam purchase agreement  Dow
Corning Corp (affiliate)
    
    
    1,324
    
    
    
    1,391Purchases under demineralized water
supply agreement
    
    
    1,855
    
    
    
    1,951Accounts receivable
    
    
    3,751
    
    
    
    3,926Accounts payable
    
    
    674
    
    
    
    671Standby and backup fees
    
    
    199
    
    
    
    197Alanna CorporationAlanna Corporation
    
    $
    1
    (2)
    
    
    .00001
    %
    
    Note receivable
    
    
    1
    
    
    
    1Limited Partner; wholly-owned subsidiary
of Alanna Holdings CorporationTOTAL PARTNERS EQUITY (DEFICIT)
    
    $
    (204,027
    )
    
    
    100.0
    %
 Footnotes to Partners Equity and Related Party Transactions
 
 (1)
    
    Effective March 1, 2006, El Paso Corporation transferred the general and limited partnership
interests of Source Midland Limited Partnership, MEI Limited Partnership and Micogen Limited
Partnership to the wholly-owned subsidiary El Paso Midland, Inc.(2)
    
    Alannas capital stock is pledged to secure MCVs obligation under the lease and other overall
lease transaction documents. - 16 -




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A)
   RESULTS OF OPERATIONS
 Forward-Looking Statements and Information
 Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995.
  Outlook
  Operating Outlook.
 Energy Rates and Cost of Production.
 - 17 -




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Capacity and Energy Payments Under the PPA.
 - 18 -




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##### Table of Contents



Michigan Electric Industry Restructuring.
   Federal Electric Industry Restructuring
  - 19 -




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##### Table of Contents



Comparison of the Three Months ended March 31, 2006 and 2005
 Overview
  Operating Revenues
  Three Months EndedMarch 31,2006
    
    2005Operating Revenues
    
    $
    142,671
    
    
    $
    150,059Capacity Revenue
    
    $
    97,740
    
    
    $
    99,522PPA Contract Capacity (MW)
    
    
    1,240
    
    
    
    1,240Billed PPA Availability
    
    
    96.7
    %
    
    
    98.5
    %Electric Revenue
    
    $
    39,372
    
    
    $
    44,510PPA Delivery as Percentage of Contract Capacity
    
    
    45.8
    %
    
    
    66.9
    %PPA, SEPA and Other Electric Deliveries (MWh)
    
    
    1,345,665
    
    
    
    1,913,006Average PPA Variable Energy Rate ($ / MWh)
    
    $
    20.55
    
    
    $
    16.70Average PPA Fixed Energy Rate ($ / MWh)
    
    $
    4.29
    
    
    $
    3.99Steam Revenue
    
    $
    5,559
    
    
    $
    6,027Steam Deliveries (Mlbs)
    
    
    1,624,860
    
    
    
    1,727,960
  Operating Expenses
  - 20 -




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##### Table of Contents



Other Income (Expense)
  LIQUIDITY AND CAPITAL RESOURCES
    - 21 -




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##### Table of Contents



DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS
  Payments Due by Period (1) (In Millions)Less Than
    
    One to
    
    Three to
    
    More ThanContractual Obligations
    
    Total
    
    One Year
    
    Three Years
    
    Five Years
    
    Five YearsLong-term Debt (2)
    
    $
    1,335.1
    
    
    $
    144.2
    
    
    $
    301.8
    
    
    $
    280.1
    
    
    $
    609.0Unconditional Purchase Obligations(3)
    
    $
    3,081.9
    
    
    $
    376.3
    
    
    $
    1,223.6
    
    
    $
    893.4
    
    
    $
    588.6Other Long-term Obligations (4)
    
    
    184.6
    
    
    
    15.9
    
    
    
    22.5
    
    
    
    30.6
    
    
    
    115.6Total Contractual Cash Obligations
    
    $
    3,266.5
    
    
    $
    392.2
    
    
    $
    1,246.1
    
    
    $
    924.0
    
    
    $
    704.2
 Amount of Commitment Expiration Per PeriodLess Than
    
    One to
    
    Three to
    
    More ThanCommercial Commitments
    
    Total
    
    One Year
    
    Three Years
    
    Five Years
    
    Five YearsWorking Capital Facility
    
    $
    50.0
    
    
    $
    50.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Payment periods represent calendar years beginning with January 1, 2006.(2)
    
    Represents expected cash payments, including interest.(3)
    
    Represents estimated minimum commitments under current long-term natural gas
contracts, natural gas transportation reservation charges, GTG compressor parts and the ground
lease agreement.(4)
    
    Represents the cost of current Facility maintenance service agreements, spare parts
and DCC termination payment.(5)
    
    No amounts have been included for early termination fees under the PPA or SEPA. OFF-BALANCE SHEET ARRANGEMENTS
  CRITICAL ACCOUNTING POLICIES
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
 - 22 -




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##### Table of Contents



Expected Maturity In
    
    Fair Value2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Thereafter
    
    TotalDebt:Long-term Debt Fixed
Rate ($US in millions)
    
    $
    144.2
    
    
    $
    150.9
    
    
    $
    150.9
    
    
    $
    147.1
    
    
    $
    133.0
    
    
    $
    609.0
    
    
    $
    1,335.1
    
    
    
    N/AAvg. Interest Rate
    
    
    9.4
    %
    
    
    9.4
    %
    
    
    9.4
    %
    
    
    9.4
    %
    
    
    9.4
    %
    
    
    9.4
    %
    
    
    9.4
    %
 Commodity Risk.
  Expected Maturity in 2006/2007
    
    Fair ValueFutures Contracts:Contract Volumes (10,000 MMBtu) Long/Buy
    
    
    1,731
    
    
    
    Weighted Average Price Long (per 10,000 MMBtu)
    
    $
    6.401
    
    
    $
    8.281Contract Amount ($US in Millions)
    
    $
    110.8
    
    
    $
    143.3
 Expected Maturity in 2006/2009
    
    Fair ValueNYMEX Commodity Swap Contracts:Contract Volumes (10,000 MMBtu) Long/Buy
    
    
    3,002
    
    
    
    Weighted Average Price Long (per 10,000 MMBtu)
    
    $
    4.611
    
    
    $
    8.384Contract Amount ($US in Millions)
    
    $
    138.4
    
    
    $
    251.7
 Expected Maturity in 2006
    
    Fair ValueOption Contracts:Contract Volumes (10,000 MMBtu) Long/Buy
    
    
    200
    
    
    
    Contract Volumes (10,000 MMBtu) Short/Sell
    
    
    400
    
    
    
    Weighted Average Price Long (per 10,000 MMBtu)
    
    $
    0.900
    
    
    $
    0.163Weighted Average Price Short (per 10,000 MMBtu)
    
    $
    0.400
    
    
    $
    0.492Contract Amount ($US in Millions)
    
    $
    .0200
    
    
    $
    1.643
 - 23 -




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  - 24 -




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Property Taxes
  NOx Allowances
  Michigan Department of Environmental Quality Enforcement Action
   - 25 -




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##### Table of Contents



Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 31.1      -
    
    Certification of President and Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2       -
    
    Certification of Chief Financial Officer, Vice President and Controller Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.32.1       -
    
    Certification of President and Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2       -
    
    Certification of Chief Financial Officer, Vice President and Controller Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 - 26 -




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##### Table of Contents



SIGNATURES
  MIDLAND COGENERATION VENTURELIMITED PARTNERSHIP(Registrant)Dated:
    
    May 1, 2006
    
    
    
    /s/ Joseph L. Roberts, Jr.Joseph L. Roberts, Jr.President and Chief Executive OfficerDated:
    
    May 1, 2006
    
    
    
    /s/ James M. RajewskiJames M. RajewskiChief Financial Officer,Vice President and Controller
 - 27 -




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NO.
    
    DESCRIPTION31.1      -
    
    Certification of President and Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2       -
    
    Certification of Chief Financial Officer, Vice President and Controller Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.32.1       -
    
    Certification of President and Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2       -
    
    Certification of Chief Financial Officer, Vice President and Controller Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.